Tax-deferred vehicles like 401(k)s, IRAs, and the like are great things. You lower your taxable income on a yearly basis by what you contribute, and sometimes your employer will match a portion of what you save.
However, we all know the US Government gets some benefit out of this as well, and it comes when you start distributing what you've saved. For example, think of your 401(k) as a business. Every time you're ready to take some profit out of that business, you have to split it with a silent business partner. That partner is going to take a portion of your profits. You have no say in how much they take. Sometimes it's more, and then four years later, it may be less. But we know that they're always getting their share.
A strategic Roth conversion is how we buy out that silent partner. They take their share today, and from that point on, everything the business earns (including all the growth along the way!) is fully yours. You own all the equity, and you keep every dollar of profit you ever take.
The "strategic" part is everything. Converting the wrong amount in the wrong year can push you into a higher bracket, raise your Medicare premiums, or cause more of your Social Security to be taxed. Done right, we sidestep all of that, and we keep all of your principal safe from the market while we're converting.
Here's how it works:
- We know before we go. We'll use our Strategic Roth Conversion Calculator to do a complete analysis of what you make, what we convert, and how that affects every other dollar you pay in taxes.
- We control the bracket. We convert only enough each year to fill up your current tax bracket without spilling into the next one, so you're never paying a higher rate than you have to.
- We pick when we convert. Most people don't know that there's no penalty for converting funds into a Roth IRA at any point in their lifetime. That means if you have an old retirement account from a job you left a long time ago, you could convert it now so that what it grows into is tax-free when you need it in retirement.
- We watch the ripple effects. Conversions can quietly raise your Medicare premiums and the taxes on your Social Security. We plan around those thresholds instead of tripping over them. This can also be addressed by converting in years where Medicare premiums or Social Security paychecks aren't a thing yet.
- We spread it out. Rather than converting everything at once and taking one huge tax hit, we spread it across several years to keep each year's bill manageable. When we know how much we're going to convert, we know how much we're going to owe in taxes on that conversion come next April.
The goal is to pay taxes once, at a rate we can actually see today, rather than leaving the bill for a future where rates are anyone's guess. Your CPA is the final word on the numbers, and we're always happy to bring them into the conversation or introduce you to one of our CPA partners.
When it's all said and done, a strategic Roth conversion is about one thing: maximizing the profit of your retirement "business" when you're ready to start taking it. That begins with taking full ownership, by buying out the silent partner you have today.
Common Questions
What is a Roth conversion?
A Roth conversion is when you move money from a tax-deferred account, like a traditional IRA or an old 401(k), into a Roth. When you move those funds, you pay tax on them now, and from there on, that money grows and is distributed tax-free for the rest of your life. In plain terms, it's choosing to settle up with the IRS today, at a tax rate you can see, instead of leaving the bill for the future when nobody knows what those rates will be.
Is a Roth conversion worth it?
"Worth it" is a question only you can answer. The good news is you'll have a ton of information about the pros and cons of making that choice. For a lot of people, taxes are a real concern in retirement. For others, it may not be a concern at all. It really comes down to one question: do you think your tax rate will be higher or lower in the future than it is today? If your gut says higher, it's worth having a conversation and exploring your options. The only way to know for sure is to run your actual numbers, which is exactly what we do before we ever convert a dollar.
How much tax will I pay to convert?
Whatever you convert gets added to your income for that year and is taxed as ordinary income, at whatever bracket it lands in. It sounds more daunting than it is because you are fully in control. With our guidance, we'll decide how much to convert and when. That way, we can keep you inside a tax bracket you're comfortable with and avoid a surprise bill. One of the first things we do is run your scenario through our calculator so you know almost to the dollar what you'll owe come April next year. Your CPA gets the final say on the exact figure, and we'd love to involve them, or a CPA from our team, in that conversation.
Is there an income limit to do a Roth conversion?
No! This is such a positive thing, and a lot of people don't realize it. There are income limits on who can contribute (and how much) directly to a Roth, but there is no income limit on converting. It doesn't matter how much you make. If you have money sitting in a tax-deferred account, you can convert it. That's one of the reasons conversions are such a useful tool for folks who were told years ago that they made too much to have a Roth.
Who is a Roth conversion not a good idea for?
Roth conversions aren't for everyone, and in fact, they're not a great fit for a lot of people. Think of it like buying a house. You can love the place and picture your whole life in it, but whether it's the right move comes down to the numbers behind it, not just how it feels on the tour. A conversion works the same way. It might not be the right call if covering the tax would mean stretching yourself thin, or if you expect to be in a lower bracket down the road anyway. That's why we run the financials together before anyone falls in love with the idea.
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The information provided is for educational purposes only and should not be construed as legal, tax, or investment advice. Please consult with qualified professionals regarding your specific situation.
Find out if a conversion is worth it for you.
It's free to have that first conversation, and you'll walk away knowing more about your situation than you did when you came in.